Heritage and CBPP Agree: Pension Smoothing is a Gimmick

This afternoon, the Senate is expected to vote on an extension of unemployment insurance, offset with so-called "pension smoothing" - a timing shift which doesn't actually reduce the debt. The criticism against using pension smoothing as an offset is growing louder, as both the right-leaning Heritage Foundation and the left-leaning Center on Budget and Policy Priorities have declared it a gimmick.

CBPP warns that the savings from a pension smoothing offset are merely illusory, and that it fails to serve as an offset outside the 10-year budget window.

This proposed change in pension funding rules can’t “pay for” anything.  While it would raise money at first, it would lose money in later years.  Although it would offset some or all of the cost of ending the medical device tax for several years, it would swell deficits and debt for some years after that.

The proposal could produce a net revenue gain within the ten-year budget window, but produce subsequent revenue losses.  As a result, it would cease to function as an offset, and the package would then increase deficits and debt in all future decades.

The Heritage Foundation warns that changing the pension interest rate calculation could put taxpayers on the hook for bailouts, and increase the deficits that the Pension Benefit Guaranty Corporation runs.

The proposal to “smooth” pension contributions would merely shift tax revenue from the future into the present while destabilizing pensions even further and increasing the risks of a taxpayer pension bailout.

Senator Reed’s claims that the proposal would reduce the deficit by $1.2 billion are bogus, as they are based on a budget window accounting gimmick. The proposal would increase revenue in the short term but reduce revenue in future years. And by worsening some firms’ pension underfunding problems, it could actually increase the deficit in the long run.

We also have recently warned against using this gimmick as well, in a press release issued yesterday, where CRFB President Maya MacGuineas criticized pension smoothing.

"The bleak recent budget projections highlight the tremendous need to at least pay for new spending or tax cuts so we don't make the situation worse. Relying on phantom savings and timing shifts undermines the credibility of pay-as-you-go budgeting and, more broadly, fiscal responsibility."

"These are gimmicks, plain and simple...collecting more taxes now and less in taxes later doesn't help our bottom line."

On February 7, CBO estimated that the provision would raise $17 billion over the first six years, but lost money afterward. The losses in the next five years reduce the net savings to $4 billion.  However, the provision continues to lose money outside the 10-year projection window. If lawmakers extend the pension smoothing gimmick to "raise" $4 billion, it will save $4 billion over the next ten years only, but lose money over the long term.

Legislators must understand the long-term implications of using the pension smoothing payfor, and that it is unequivocally a gimmick. There are plenty of real offsets that Congress should turn to instead.

Confused about what pension smoothing is? Read a more detailed description here.

Update 2/7/14: This post has been updated to reflect the Congressional Budget Office score for the actual pension smoothing provision used in the unemployment insurance legislation, released on February 7.

THE BIG LIE In U.S.

THE BIG LIE In U.S. economics, the BIG LIE is exemplified by several widely believed, though utterly false, statements: 1. “We Americans are the federal government. Government deficits are our deficits; government debts are our debts. Our children will pay for government debt.“ Federal debt is nothing more than the total of deposits in T-security accounts at the federal reserve bank. If you own a T-security, you have a deposit in the Federal Reserve Bank. you very well may pass that bank deposit on to your children, as an interest paying asset. To “pay off the debt,” i.e. to cash in your deposit, the federal government merely will transfer dollars from your T-security account at the Federal Reserve Bank to your local bank checking account. Neither you, nor your children nor the government are burdened by this asset transfer between two of your bank accounts. 2. “Like us, the federal government must live within its means.” Families are monetarily non-sovereign. They do not have a sovereign currency. The same can be said of states, counties, cities, businesses and euro nations. None has a sovereign currency. However, the U.S. is Monetarily Sovereign. It created the dollar, its sovereign currency, by creating laws. Being sovereign over its currency, the U.S. government has the unlimited ability to create dollars. Unlike a family, which can run short of dollars, the U.S. never can run short of dollars. It has no “means” to live within. 3. “The federal debt is a burden on the federal government, a burden on us, and will be a burden on our future generations.“ That is an example of the BIG LIE. The federal debt, being deposits in the Federal Reserve Bank, is not a burden on the U.S. economy. It is not a burden on our future generations, who will not have to pay it. BANK DEPOSITS DO NOT BURDEN ANYONE. Future generations won’t be involved in any way, with liquidating deposits in the Federal Reserve Bank or any other bank. Only banks “pay off” deposits — by transferring dollars from savings deposit accounts to checking deposit accounts. 4.“ We taxpayers pay for federal spending, just as we pay for state and local spending.“ In fiscal year 2012, the federal government spent $3.5 trillion, amounting to 23 percent of the nation’s Gross Domestic Product (GDP). Of that $3.5 trillion, nearly $2.5 trillion was financed by federal revenues. The remaining amount (about $1.1 trillion) was financed by borrowing; this deficit will ultimately be paid for by future taxpayers. -Center on Budget and Policy Priorities  . That is an example of the BIG LIE. Neither borrowing nor taxing finances a Monetarily Sovereign government. It has the unlimited ability to create its own sovereign currency. All dollars going to the federal government disappear from the money supply and thus, are destroyed upon receipt. The U.S. government itself has no dollars. It pays its bills by creating dollars ad hoc, but it does not retain those dollars. The entire money supply is in the private sector. THE GOVERNMENT HAS NONE. And that is why the broad masses of Americans don’t just believe the BIG LIE, but argue strenuously, even angrily, against anyone who exposes them to facts.

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